Singapore does not need to emulate Nordic-type welfare

Singapore has gone very fast and far since our independence. We used to be a struggling new nation finding our identity and destiny in the midst of political and economic turmoil, within a short span of just one generation, Singapore has leapfrogged from a third world country to the top league. It is indeed surprising to find Singapore being constantly benchmarked against leagues of the most admired nations in the world – the Nordic Countries. Singapore should take pride that we are doing reasonably well. While there are always rooms for improvement, we should also note that Singapore and Scandinavian or Nordic Countries are fundamentally different. It is too simplistic just to look at the numbers at make comparison without taking into consideration the geographical, cultural, social-economic and political context.

Scandinavia

Scandinavia is a historical and cultural-linguistic region in Northern Europe characterized by a common ethno-cultural Germanic heritage and related languages, which includes the three kingdoms of Denmark, Norway, and Sweden. Some tourist-oriented sources argue for the inclusion of Finland and Iceland as Scandinavian countries. Here is a Brief Snap Shot of the population and land size of the countries.

The issue

A feature “The Nordic Give and Take” written by Robin Chan of the Straits Times on 23 June 2012, may provide some insight into the comparison between Singapore and the Scandinavian countries. Here are the excerpts:

“MR HENRIK Ziegler left Denmark for Singapore with a dream. He wanted to build his own business.

He founded Dantech Food Systems, a maker of advanced freezers for the food industry, in 1997.

In 2005, the firm had expanded to become a market leader in the region, and it was bought by a larger Danish firm for a hefty sum.

This would not have been possible if he had stayed in Denmark, Mr Ziegler says, where high taxes on the successful preserve equality but make it difficult for individuals to make a lot of money.

Businesses and businessmen in Denmark pay some of the world’s highest taxes – companies pay 25 per cent and personal income is taxed as high as 48 per cent.

In Singapore, corporate tax is 17 per cent, and individuals pay only up to 20 per cent to the taxman on their income.

Mr Ziegler, 51, says: “I have no plans to go back. Singapore is my home now, it is the place in which I feel I belong and can succeed”

The ST story then contrast the above with an observation made by a former Norwegian sailor, Knut Egeberg, who thought Singapore should better take care of the poor and the aged. He mentioned that:

“In Norway, when you are working, the government taxes you a lot. But once you grow old, the government takes care of you and pays you a pension.”

In contrast with the Nordic model, Singapore’s approach to welfare has long emphasised the importance of self-reliance. Help is targeted at those who most need it. That means the old who cannot work and have no family to support them are put on the public assistance scheme.

In countries like the Britain and the United States, where unbridled capitalism has brought about protests unhappiness, and visible social inequality, the Nordic model has its admirers. However, social and economic models are heavily influenced by historical, social, cultural, geographical, political, religious and other factors. Successful model developed and adopted by a particular country may not work well when the critical factors mentioned above are different or start to change.

For example, Japan’s life-long employment practice was once admired and emulated by few countries but such employment system is buckling under the pressure of globalization when many Japanese corporations shift their productions to other countries which can provide skilled and inexpensive labour. Even as the citizens of Nordic countries disagree among themselves on the merits of their tax and welfare system.

Daniel J. Mitchell, a Senior Fellow at the Cato Institute, the free-market, Washington D.C. think tank recently wrote an article last year “Even Scandinavian welfare states realise too many handouts are destructive”(http://www.thecommentator.com/article/4107/even_scandinavian_welfare_states_realise_too_many_handouts_are_destructive) He pointed out that there’s growing recognition that maybe, it’s not a good idea to pay people not to work. Particularly when you trap them in lives of dependency and despair and undermine progress in the fight against poverty. Even Scandinavian nations are realising that there has to be a limit to incentive-killing and taxpayer-sapping redistribution.

He quoted a Bloomberg report about developments in Denmark”:

Danish Finance Minister Bjarne Corydon said in an interview in Copenhagen: “Scandinavia’s weakest economy (Denmark) can no longer afford the kinds of entitlements its citizens were raised on…We live in a world of global competition for jobs…we require a modernization of the welfare state.”

He said this last year (2013) when Denmark’s economy contracted 0.2 percent in the first half, needs to contain welfare spending or risk losing the respect of investors, Corydon said. Danes, who like Swedes and Norwegians, are used to generous jobless pay as well as state-financed education and health care, need to learn that those privileges come at a cost, he said. …Denmark’s challenge now is to ensure its welfare habits don’t leave it unable to compete with populations that work harder at a lower cost, he said.

The Danish Finance Minister had to voice his concerns loud can clear because Denmark last year cut its economic forecast and predicted a widening budget deficit. He said, Denmark’s challenge now is to ensure its welfare habits don’t leave it unable to compete with populations that work harder at a lower cost, he said.

From 2000 to 2012, average hours worked in Denmark fell 8 percent, according to the Organization for Economic Cooperation and Development. Danes spent 1,431 hours working last year, 24 percent less than the OECD average, the Paris-based group estimates.

The development has left the country’s workforce less productive. Since 2000, Denmark’s unit labor costs have risen 30 percent, compared with an 11 percent increase among its trade competitors, according to a 2012 OECD study.

Denmark’s $320 billion economy, which shrank 0.5 percent in 2012, is trying to adjust to the fallout of a property boom that started early last decade. Though Danes with jobs earn more and work less, on average, than their rich-world peers, out-of-work Danes in some cases earn even more than those in low-skilled jobs.

Danish Economy Ministry showed that about 250,000 Danes have no economic incentive to give up their unemployment benefits and take a job. That compares with 2.64 million people in full- and part-time jobs, according to Statistics Denmark.

The nation was dragged into a debate on its jobless benefits after state broadcaster DR in September showed an interview with Robert Nielsen — dubbed “Lazy Robert” — who said he was content on welfare and had no intention of taking a job that didn’t inspire him.

Corydon said the country needs to get better at choosing which services to fund.

“The modern welfare state needs to prioritize things in a new way and create the best possible conditions for people to get a job,” he said. “We need to prioritize some welfare services over others; we put education and healthcare first.”

Economists had been debating about welfare states for a long time. Denmark is rethinking about its welfare approach and Singapore should study lessons of these welfares state and consider the model is suitable for Singapore’ s context given the facts that we are a city state, surrounded by low cost countries, with no natural resources and highly dependent on fluctuating international trade.

Comparisons of national wealth are also frequently made on the basis of nominal GDP, which does not reflect differences in the cost of living in different countries Using a PPP basis is arguably more useful when comparing generalized differences in living standards on the whole between nations because PPP takes into account the relative cost of living and the inflation rates of the countries, rather than using just exchange rates which may distort the real differences in income.

Singapore ranked top 3 in the world in terms of PPP by IMF, ahead of all Nordic countries; top 5 by CIA, still ahead of all Nordic countries, top 5 by the World Bank, only one place behind Norway, an oil rich country.

3. Money and purchasing power do not tell all the picture, Human Development Index compiled by the United Nations may shed more light on how is Singapore doing in terms of standard of living

Personal income tax rates in Singapore are one of the lowest in the world. Singapore follows a progressive tax rate starting at 0% and ending at 20% above S$320,000. There is no capital gain or inheritance tax. In addition, Individuals are taxed only on the income earned in Singapore. The income earned by individuals while working overseas is not subject to taxation barring few exceptions.

For YA 2013, a personal tax rebate of up to a maximum of $1,500 is granted as follows:
30% rebate for taxpayers below 60 years of age as at 31 Dec 2012
50% rebate for taxpayers 60 years of age & above as at 31 Dec 2012

1. Gini Coefficient and Public Spending

Singapore’s Gini coefficient – a standard international measure of income inequality – rose to 0.473 in 2011, from 0.454 a decade ago. After accounting for government transfers and taxes, the Gini index narrowed to 0.452 last year, down from 0.455 in 2010.

Income inequality is measured on a scale of 0 to 1, with a higher number representing greater inequality.

Singapore’s Gini index has inched past the United States’ rate of 0.469 but is below Hong Kong, another small, business-friendly centre of free enterprise, with a Gini of 0.535 in 2010. In Nordic countries such as Norway, Sweden, Denmark and Finland, the Gini, by contrast, has hovered below 0.3.

However, for Asia as a whole, a new report from the Asian Development Bank showed recently that inequalities have widened in 11 key economies that are home to more than eight in 10 Asians.

Gini Coefficient has to be used with caution because the number simply does not tell the whole picture. For example, in fast developing countries, Gini Coefficient tends to rise as fast economic growth may worsen social equality, at least at the initial stage. Countries with stagnant growth may have stable Gini Coefficients but this may not be desirable.

Government can increase social spending and enhance social assistant schemes to bridge the divide between the rich and the poor, however, high public spending may not be desirable when Government spending competes with the private investments to produce a “crowding out” effect. ( Crowding out refers to when government must finance its spending with taxes and/or with deficit spending, leaving businesses with less money and effectively “crowding them out.”) This is a delicate balancing act that Government has to grapple with.

Overall this is a rather well-intentioned and researched article that touches on the hype up till now with Scandinavian welfare. 3 years on, the issue of income inequality still is and has increased in relevance, and the Scandinavians are similarly facing related issues.

I do however admit that I was looking forward to discussions where we do not reflexively point out how welfare is damaging and bad for productivity, but rather comprehensively ponder on whether welfare needs to be seriously considered in an age where:

1) Our baby-boomer generation is aging
2) Globalisation has increased the incomes of high-skilled workers while depressing the wages of low-skilled Singaporean workers through a liberal immigration agenda.

Once we have established a need for welfare (which could have came out clearer), then we can pinpoint what exactly is wrong with Scandinavian welfare – how are some parts incompatible with Singaporean context (economies not hugely reliant on globalisation and attraction of talent but rather based on agriculture/extractive environmental industries e.g. oil, ore mining, foresting / a small city-state with a polyglot society VS a largely homogeneous culture), and then link it all back and provide a few comprehensive policy alternatives on how welfare in Singapore can be adopted. I feel these pointers could make this article (and hopefully any follow-ups) a much more pertinent and much larger contributor within the general discourse on welfare and Singaporean policies.